Unless you’ve been living in a cave the past few weeks, I doubt you’d have missed the stock market sell-off we’ve seen. One of the most interesting statistics I’ve read regarding the global market sell-off came from the US, where the number of days it took for the stock market to lose 10% in value was just five, an all-time record.
In tandem with the move out of stocks, there have been large inflows into gold, either physically or via a financial instrument. The bottom line is that gold is currently trading at $1,660 per ounce, up over 7% in the past month.
The move has been correlated with the stock market, mostly due to the economic theory that suggests during times of uncertainty, investors prefer to hold safe-haven assets like gold and sell risker ones like stocks and oil.
Despite this, there are still several reasons why I still prefer to buy stocks over gold.
The biggest difference between gold and stocks is that most companies within the FTSE 100 index will pay you a dividend over the course of the year. Currently, the FTSE 100 average dividend yield is 4.91%, although you can find ones higher than this (some good examples are looked at here).
Gold doesn’t pay any dividends, or indeed any interest at all for holding it. Therefore, if you invested in both a dividend-paying stock and gold and neither priced moved over a year, you would have picked up income via the dividend, making the stock a better choice.
In the uncertain environment that we’re in, I think if you buy either of the two you will be holding it for a while due to the volatility we’re seeing at the moment. As this is the case, the income stream via dividend-paying stocks is much more preferable in my opinion.
Cheap vs expensive
Another point investors like myself need to take into account is that gold is currently very expensive on a historical basis, whereas UK stocks via the FTSE 100 have seen a correction, making the valuations more neutral. Some are saying stocks are outright cheap, and you can make a convincing argument around this.
However cheap you believe stocks look at the moment, as an asset class they’re nowhere near as expensive as gold. This leads me even further towards wanting to buy stocks. Buying something that’s already expensive isn’t a big strategy of mine, as likely most of the move higher has already happened and we could see a consolidation or even a correction lower.
I can’t make the claim that the gold price will quickly fall and that stocks will rally fast from here, as we may continue to see some investors act out of fear and push the price of gold even higher. But for a longer-term investor with a horizon of several years, this cheap vs expensive issue should at some point return to fair value vs fair value. On that front, stocks win every time for me.
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Jonathan Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.